RBI CREDIT POLICY - MOVING BEYOND INTEREST RATES

By Ruma Dubey

No surprises on the rate cut front but surely, the RBI went all out to address the liquidity crunch by easing on various fronts. This is a first – the RBI has shown that rate cut alone is not the only arsenal; it can help resolve the liquidity issues and help better transmission through other policy easing measures. This is huge as it actually means a reversal of six years of policy where banks and bond markets have always operated in deficits. Banks who have been complaining over various reasons for not transmitting rate cuts currently have no real reasons  – small savings rate have been slashed and the RBI has taken steps to inject liquidity; hope banks cut rates and do their bit to give impetus to growth.

The markets remained skeptical – it looked at the 0.25% rate cut and felt that it was largely on expected lines thus warranted no major celebration. On the liquidity easing front, the market was yet to fully understand and thus slumped down further into the red even as the Governor explained his policy stance.

The other good news here – Rajan, with his 25 bps cut has left more room for further rate cuts in the ensuing policies. With this rate cut, there has been a total of 150 bps rate cut since beginning of accommodative cycle. All now hinges on the banks – if they transmit only then will all these measures hold any meaning.

A quick look at the highlights of the policy:

• Reduction in repo rate under the liquidity adjustment facility (LAF) by 25 bps from 6.75 per cent to 6.5 per cent.
• Reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent with effect from the fortnight beginning April 16, 2016, while keeping the CRR unchanged at 4.0 per cent of net demand and time liabilities (NDTL)
• To continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality
• To narrow the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points, with a view to ensuring finer alignment of the weighted average call rate (WACR) with the repo rate
• Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate to 7.0 per cent.
• The Bank Rate which is aligned to the MSF rate also stands adjusted to 7.0 per cent.
• Announced open market operations of Rs.15,000 crore today
• Reserve Bank’s industrial outlook survey suggests that business expectations for Q1 of 2016-17 continue to be positive and upbeat for the services sector.
• The average daily liquidity injection (including variable rate overnight and term repos) increased from Rs.1,345 billion in January to Rs.1,935 billion in March.
• Reserve Bank also started conducting reverse repo and MSF operations on holidays in Mumbai to enable the frictionless functioning of the payment and settlement system.
• Effective April 2, 2016 the statutory liquidity ratio (SLR) of scheduled commercial banks was reduced by 25 basis points from 21.5 per cent to 21.25 per cent of their NDTL.
• Net inflows in the form of foreign direct investment (FDI) were robust in Q4 (up to January), more than sufficient to fund the external financing requirement.
• Foreign portfolio investors (FPIs), who were net sellers in the domestic capital market up to February, became net buyers in March in both equity and debt segments.
• CPI inflation is expected to decelerate modestly and remain around 5 per cent during 2016-17 with small inter-quarter variations.
• The GVA growth projection for 2016-17 is retained at 7.6 per cent
• Perhaps more important at this juncture is to ensure that current and past policy rate cuts transmit to lending rates.
• Smooth the supply of durable liquidity over the year using asset purchases and sales as needed
• A draft circular on the Large Exposures Framework will be issued for public comments in June 2016 (to be implemented by January 1, 2019).
• In addition to recently licensed differentiated banks such as payments banks and small finance banks, the RBI will explore the possibilities of licensing other differentiated banks such as custodian banks and banks concentrating on whole-sale and long-term financing. A paper in this regard will be put out for comments by September 2016.
• It has been decided to permit NRIs to participate in the Exchange Traded Currency Derivatives (ETCDs), subject to limits and other conditions that are stipulated by the exchanges recognised by the SEBI. Guidelines in this regard will be issued by the Reserve Bank in consultation with the SEBI by end-June 2016.
• In order to make the process of registration of new NBFCs smoother and hassle free, it has been decided to simplify and rationalise the process of registering new NBFCs.
• The second bi-monthly monetary policy statement will be announced on June 7, 2016; the third on August 9, 2016; the fourth on October 4, 2016; the fifth on December 6, 2016 and sixth on February 7, 2017.